Capturing Unearned Value
Leakages to Assist Markets to Work for the Poor
Mercy Brown-Luthango
[A policy paper prepared for the
Development Action Group, South Africa, August, 2007]
Introduction
South Africa's history of colonization, through legislation such as
the 1913 Land Act, the Apartheid Group Areas Act and bantustan and
influx control policies have produced a highly unequal urban land
market which does not allow space or opportunity for the participation
of the poor. The after effects of these policies still pervade the
urban landscape in the form of increasing homelessness, a continuing
rise in informality, persistent segregation and unabated urbanization
of poverty. This paper will explore the use of different instruments
which government can use to capture value from government investments
in order to finance the provision of infrastructure and services, such
as affordable housing to the poor. These mechanisms however should not
only be directed at accessing more financial resources, but should be
aimed at eradicating the remnants of the apartheid history and making
the urban landscape more equitable, inclusive and sustainable. The
paper will firstly discuss the urban development and planning
challenges facing the state as contrasted with the booming property
and land market. The argument will be made that the poor are not given
space or opportunity to participate in this market and the market can
therefore not be relied upon to cater to the needs of the poor and
marginalized. The paper thus argues for bold, decisive and strategic
interventions in the market to ensure that the poor reap some of the
benefits of government's investment in the market.
1. Background
Over the last twelve years the South African government has made
significant strides in addressing some of the major development
challenges facing the country. Good progress has for example been made
in improving people's access to electricity, clean water and
sanitation. The number of electricity connections increased from 32%
in 1996 to 70% in 2001, the percentage of people having access to
clean water increased from 60% in 1996 to 85% in 2001, and access to
sanitation improved from 49% to 63% during the same period[1] .
Despite these gains though, a huge backlog in social service delivery
still remains. The number of poor people in South Africa living on
less than $1 dollar[2] a day has risen from 9.4% of the national
population in 1995 to 10.5% in 2002. Poverty however, is not only
about income deprivation. "Poverty exists when an individual or a
household's access to income, jobs and infrastructure is inadequate or
sufficiently unequal to prohibit full access to opportunities in
society. The condition of poverty is caused by a combination of
social, economic, spatial and environmental factors" (Boraine;
2002).
More than twenty-seven percent of the urban population lives in
informal structures. Between 1996 and 2001 there was a net increase of
735 627 informal dwellings, excluding backyards, and the absolute
number of households without formal shelter increased by 264 649
during the same period (Boraine et al; 2004). According to the South
African Human Rights Commission (SAHRC) there are six million landless
people in South Africa[3] . By the end of 2001, little more than 1% of
agricultural land in South Africa had been redistributed through South
Africa's redistribution programme and by mid-2003 only 2.3% of
agricultural land had been redistributed (Lahiff and Rugege; 2002). As
a result the 87%-13% division of land in favor of white citizens of
South Africa brought about by the 1913 Land Act and subsequent
apartheid policies remains virtually unchanged. Government has
consequently had to revise its target of redistributing 30% of
agricultural land by 1999 to reaching this target by 2014[4] . The
current pace of land redistribution will however need to increase five
times in order for government to reach this target[5] . Securing
adequate finance has been identified as one of the factors impeding
the success of government's land redistribution programme (Van den
Brink; 2004)...
2. "The Apartheid City"
Under apartheid, urban planning and management shaped the urban
landscape in very specific ways. The "Apartheid City was a
political economy of space" which was based on two policies, i.e.
racially-based spatial planning and development for some at the
expense of others"[6] . Apartheid urban planning reserved
specific spaces for the residential location of specific races and
classes. Residential location ultimately determined the level of
access to resources, infrastructure, other services and economic
opportunity. Cities were specifically designed to push poor black
citizens to the margins of the city, huddled in poorly designed and
serviced settlements, far removed from socio-economic opportunities.
As a result, poor, mostly black, people were "geographically,
materially and psychologically distanced from opportunities and
advantages normally associated with city life". Huge,
well-located areas of the city were reserved for the rich, mostly
white sector of the population. These areas were well-resourced,
well-serviced and located in close proximity to employment and other
economic opportunity. The size of that part of the city reserved for
whites was often far out of proportion to the actual size of the white
population (Boraine et al, 2004).
Apartheid policies and urban management strategies affected the lives
and life chances of the urban poor in very significant ways:
- Forced removals robbed people of prime land, and also
destroyed important community social networks on which the poor
depend for survival.
- A prominent feature of urban planning and management under
apartheid was the cross-subsidization of services to the rich by
the poor. Residents of informal settlements for example pay the
highest per item cost on basic commodities such as water and fuel
(Parnell; 2004, p13). Irrational urban design which puts the poor
on the periphery of the city also means increased transport costs
to the poor.
- Zoning and planning laws placed restrictions on trading and
retail activity in the townships and ensured that commercial
activity was concentrated in rich white suburbs. This forced
resources out of black areas into white suburban areas and ensured
that black townships remained economically underdeveloped while
affluent, white suburbs flourished[7] .
- The unequal provision of services e.g. education means that
the poor lack the skills needed to access employment thereby
trapping them in a cycle of poverty. In 2001, only 26.9% of
residents of the South African Cities Network (SACN) had a matric
certificate and only 11% had tertiary education (Boraine et al;
2004).
- The design and layout of the apartheid city also had
detrimental environmental costs in terms of the use of resources
such as energy and water and transport routes. The State of the
Cities Report (Boraine et al; 2004) quote the following alarming
statistics:
o According to projections for the "National Spatial
Development Perspective", the use of water resources in at
least four of the nine cities included in the report could
possibly run into crisis in the near future.
o The sewerage networks in many cities are running at full
capacity and old infrastructure will soon need to be replaced.
o The long time spent traveling to and from work, because of the
location of settlements for the poor, is causing huge congestion
on the roads. It is estimated that the average time it takes to
travel to and from work in Johannesburg is 50 minutes. This
increases to 91.7 minutes for those who have to take two buses to
work and 120 minutes for those who have to use a train, bus and
taxi (Boraine et al; 2004, pg. 15). Besides the impact on the road
systems, this also has social costs in terms of the time spent
away from family.
o An ecological analysis of Cape Town revealed that "although
the total municipal area for Cape Town is 2487 km2 and its built
up area is just 774km2, its energy use, building materials inputs,
waste outputs and food and fresh water requirements has an
effective impact on some 128 264km2.[8]
The issues raised above bear testimony to the unequal and
exclusionary nature of the Apartheid city. Moreover, they illustrate
the irrational, dysfunctional and unsustainable nature of urban
planning and management under Apartheid. With the abolition of
Apartheid in 1994, the new government made a commitment to redress
these imbalances and inequality and to create cities that are more
equal, inclusionary, well-governed, productive and sustainable. This
commitment is evident in the introduction of a number of laws and
policies aimed at guaranteeing people's access to a host of
socio-economic rights, the right to adequate housing being one of the
most significant rights.
3. The Rights-based approach to housing
The South African government has adopted and ratified several
international laws, charters, treaties and declarations which
guarantee the right of each citizen to adequate housing and a decent
standard of living. These include:
- Universal Declaration of Human Rights
- International Covenant of Economic, Social and Cultural Rights,
- Habitat Agenda
- Convention on the Rights of the Child
On the home front, the South African constitution is the most
important piece of legislation providing for and protecting the right
of each South African to "adequate" housing. Section 26 of
the constitution states that:
- Everyone has the right to adequate housing,
- The state must take reasonable legislative and other measures,
within its available resources, to achieve progressive realization
of this right
- No one may be evicted from their home, or have their home
demolished, without an order of the court, made after considering
all the relevant circumstances" (South African Constitution,
Section 26 (1), (2) and (3)
The state thus has a constitutional obligation to take "reasonable"
legislative and other measures to ensure the progressive realisation
of every South Africa's right to "adequate" housing and
other socio-economic rights. Rights on paper however, do not
necessarily translate into a substantial improvement of the living
conditions of the poor and marginalized. It has been said that rather
than address imbalances, post-Apartheid policies have tended to
compound social and human challenges inherited from our country's
past.. According to the State of the Cities report, South African
cities today are more unequal than they were ten years ago. Spatial
planning and the provision of housing to the poor in post-Apartheid
South Africa illustrate this point very well. Although 1.6 million
houses have been provided since 1994, they have tended to enforce
traditional apartheid planning where the poor are still located on the
periphery, far removed from employment and economic opportunities. A
number of new housing developments have sprung up on the margins of
the city. This has resulted in increased urban sprawl and
de-densification. Between 1996 and 2001, there was a net increase of
743 843 formal self-standing houses in the nine cities included in the
SACN report. This has implications, increasing costs being one of
them, in terms of the provision of networked infrastructure and the
provision of new service connections.
Public transport costs in Cape Town for example increased
substantially between 1998 and 2002. Public transport subsidies for
rail and bus transport in Cape Town increased from R415 million in
1998/1999 to R430 million in 2001/2002. During the same period, money
spent on housing in Cape Town was R206 million in 2001/2002 and R231
million in 2002/2003. This means that the amount spent on the
transport subsidy was more than double what was spent on the housing
subsidy[9] . The motives for continued and exorbitant state spending
on transport subsidies should be questioned. This could be construed
as a deliberate action by the state to continue to subsidize and
reproduce capitalism. The illogical increase in subsidising public
transport to facilitate further peripheralisation of the poor in the
city is a reflection of the divergence between policy and practice.
Yet, in the midst of this crisis, the country has experienced a
phenomenal boom in the property and land market over the last seven
years. As the following discussion will show however, the poor have
largely been excluded from participation in this market.
4. A Booming Property and Land Market
The South African residential property market has seen exceptional
growth since 2000. Between 2000 and 2005, house prices increased by an
average of 20% per year. In 2004 alone, house prices increased by
32.2%, although it slowed down somewhat in 2005, a still significant
growth of 22.9% was recorded. Growth of 15.3% was experienced during
the first six months of 2006 (ABSA; 2006). The increase in housing
prices has put home ownership out of reach of a great proportion of
the population. Between 2000 and 2004, the price of the average South
African house (80m2 - 400m2) increased from R240 000 to R488 456
(Philp; 2004). Prices of houses at the top end of the market (>
R2.6 million to R9.5million) doubled and in some cases trebled between
1999 and 2005. Houses in the "affordable" (< R226 000)
segment of the market has however not shown the same level of growth.
One factor accounting for this is a lack of "trading" in
this sector of the market and below which is due to the fact that
households in these segments are often unable to afford to move into a
higher bracket of the housing market and thus hang on to their
properties. This, according to the Western Cape Sustainable Human
Settlement Strategy, means that "households are unable to realize
the 'full' asset value of their housing, which undermines housing as a
potential investment for low income households at a time when it is
realizing astonishing growth for high income households". This
means that the poor are effectively excluded from participating in
this lucrative property market.
Cape Town has seen the second largest growth in the property market
after Gauteng. An analysis of building statistics confirms the growth
in numbers and value of property in Cape Town for the period January
2004 to December 2005. The number of plans approved and units
completed at the upper end of the property market in the Western Cape
increased steadily and was only surpassed by Gauteng during the same
period. Growth in commercial property followed a similar trend. The
Western Cape experienced growth of 24.2% in this segment of the market
for the period January 2004 - December 2005, representing 26.8% of
national floor area of commercial space[10] .
Land prices also increased substantially over the last few years.
Nominal residential land prices increased by 17.3% to approximately
R280 200 on average during the second quarter of 2006, compared to
22.9% in the first quarter (ABSA; 2006). Scarcity of suitable land for
residential development means that this growth in the price of land is
unlikely to slow down in the near future. Land speculation has been
highlighted as one factor accounting for the significant increase in
land prices. The investment potential of land has reached critical
peaks, especially highly sought after coastal land in the Western
Cape. On the West Coast, buyers of "raw" land have realised
profits of up to 1000% after holding on to it for six to eighteen
months (Business Report, 2005).
It is clear that a market-oriented, trickle-down approach will not
address South Africa's urban development and housing crisis. The scale
of this crisis calls for bold, decisive initiatives and strategic
interventions in the market to make it work better for the poor. These
interventions should be aimed at redistributing the value derived from
a soaring property and land market more equally, and simultaneously
strive to protect and secure the right of the poor in the city. Value
capture refers to a process by which all or a portion of increments in
land value attributed to public and "community"
interventions are recouped by the public sector. This increased value
can arise from three sources: changes in land use regulations,
installation of infrastructure, and growth of the population and
income of the whole society which would create a demand for land
thereby increasing the price of land (Doebele, 2001). Mechanisms to
capture value include conversion of additional value into public
revenues e.g. taxes, fees or through infrastructure developments to
benefit the poor. The creative and innovative utilization of value
capture mechanisms can provide additional resources which can assist
the state in meeting its constitutional obligation in terms of the
progressive realisation of the socio-economic rights of all its
citizens.
Value capture initiatives should not only be aimed at securing
additional financial resources, but should also be targeted at using
planning and development instruments in a strategic way in order to
transform the urban landscape and facilitate the poor's access to
resources and economic opportunities. The next part of this paper will
explore mechanisms for how government can capture value from the land
and property markets which will provide the revenue to finance the
provision of shelter and services to the poor in well located areas.
It will also discuss how planning and development instruments like
zoning and other development regulatory tools for example can be used
in a creative way to make the urban milieu more accessible to the
poor.
5. Capturing Value for Infrastructure and Services Provision.
5.1. Property Taxation and the Land Value Tax
Property taxation evokes different feelings from different people. "It
is the best of taxes, it is the worst of taxes" (Hariss;
). Property taxation can take different forms. There is the flat rate
system which is a tax on the value of the land and buildings. The
other form of property taxation is land value taxation. Land value
taxation could include site value rating, which is a tax on the value
of the land only, excluding the value of buildings and improvements;
or a form of composite rating, also referred to as the two-rate
system. The two-rate system allows for the value of the land to be
taxed at a higher rate than the value of the buildings or
improvements. Property taxes, specifically the flat rate system, have
been criticised for impeding urban renewal as it discourages property
owners from investing money in the upgrading and maintenance of
property. Another criticism of the property tax is that it is biased
against low income earners as it often "burdens low-income groups
more heavily in relation to income than those with higher incomes"[11]
. Land value taxation, it is argued, is a fairer and more just system,
because the land is a natural resource. It is 'common property"
which means that 'all have an equal right to use and enjoy it".
"The equal right of all men and women to the use of land is
as clear as their equal right to breathe the air. It is a right
proclaimed by the fact of their existence. For we cannot suppose that
some men and women have a right to be in this world and others do not"[12]
.
The value of land increases due to community inputs, e.g. provision
of infrastructure and services rather than purely from the landowner's
individual efforts and it seems fair that the community share in the
benefits of an increase in land values. However, besides the
philosophical argument for land value taxation, it is purported to
have a number of other benefits. Land value taxation, it is suggested,
brings unused land close to the city into production and therefore
reduces urban sprawl. It discourages land speculation by forcing
landowners to develop land rather than hold on to vacant land for
speculative purposes. A land value tax thus makes the economy grow
more efficiently by diverting investment into expanding businesses
which could stimulate job creation and productivity (Wetzel; 2004:
p16).
5.2 The Land Tax in South Africa and Around the World
As far back as 1994, land value taxation[13] was proposed as an
important economic tool to help South Africa deal with the enormous
backlog in the provision of the socio-economic rights of the majority
of South Africa's citizens inherited from the previous Apartheid
government. Feder and Harrison (1994) argued that a tax on land would
"encourage investment, create jobs, and enable those who
possessed land to choose either to use the land properly and pay the
community for the benefits received or to release it to others".
South Africa does have an established history of property taxation.
The property tax, which refers to a tax called the "rates on
property" has been in effect in South Africa since 1836 (Franzsen
and McCluskey, 2004). Feder and Harrison (1994) however argued that
the rates charged were too low to allow the country to benefit
substantially from this tax. There was also great diversity in the
methods used in different municipalities (areas) to collect the tax.
In some cases the tax was levied on the site-value of land, some areas
preferred the flat rate, while others preferred to levy the tax on the
"composite value"[14] .
Since the advent of democracy in South Africa in 1994, the new
government has made a systematic effort to restructure the property
tax in South Africa. The government's efforts to restructure the
country's property tax legislation commenced in 1997. The eighteenth
draft of the "Local Government: Property Rates Bill"
was published in March 2003 and made provision for the establishment
of a single system for property taxation on a national basis with the
aim of creating a more uniform property tax system (Franzsen and
McCluskey, 2004). The system which was to be implemented is a rate
levied on the "improved value of property". The Bill was
enacted in May 2004 and makes provision for the levying of a rate on
the market value of the immovable improvements on a property. Market
value is defined in the act as "the amount the property would
have realized if sold on the date of the valuation in the open market
by a willing seller to a willing buyer"[15] . The new Property
Rates Act has thus effectively done away with land value taxation.
The possibility of a national land value tax has however been raised
again in recent times. In 2004 Van den Brink argued that a national
land value tax could be a politically attractive source of revenue for
the country. According to van den Brink, a national land value tax
could lower the difference between the asset and agricultural value of
land thereby facilitating small scale black farmers' access to
agricultural land. This call was reiterated in March of 2006 when
Thomas and van den Brink argued that a land value tax should form part
of a broader land reform policy. They argued that a land value tax is
politically and economically attractive because it would:
- bring more unused land into the market, thereby combating urban
sprawl
- control land price inflation
- reduce speculation by absentee landlords
- be a great source of revenue for land reform and local
government
The implementation of a land value tax was also one of the main
recommendations which emerged out of the National Land Summit held in
2005 in Johannesburg, South Africa[16] .
This call for a tax based on land values is echoed across the world,
especially in developing countries that are facing similar development
challenges as South Africa[17] . However, the use of pure land value
taxes have declined in most parts of the developed world (Department
of Land Affairs and World Bank, 2006). Possible reasons cited for this
are administrative difficulties and low collection rates (Netzer,
1998). However there is a need for further interrogation of these
reasons. In most countries land owners are often allied to politicians
and those in positions of power. As they are the ones who stand to
lose most from the introduction of a land value tax, it is not
inconceivable that land owners could use their political influence to
obstruct the implementation of a land value tax. In the United States
for example Netzer (1998) points out that "large-scale owners of
land are now and always have been highly aware of their vulnerability
to government actions that can have major effects on the value of the
land they own, negative and positive, and therefore have been highly
active in politics and campaign financing, especially at the local
government level". A conflict of interest, where a number of the
most senior government officials were also the owners of large tracts
of land, was highlighted as one reason for the failure of the land tax
in Malawi (Ahene, 2000).
Many developing countries have however opted for some or other
variant of the land value tax aimed at recouping unearned increased in
land value. Doebele (2001) identifies several value capture mechanisms
which vary in terms of their degree of interference in the property
and land market. These range from full public ownership which
represents the greatest level of interference in the market to the
general property tax which represents the lowest level of
interference. Some of these mechanisms are discussed below.
5.3 Other Value Capture Mechanisms and Their Implementation Around
the World
a) Full public ownership of land. This is a value
capture instrument through which government retains ownership of
land, but leases only the right to develop, use or transfer land to
private investors. This is a significant source of revenue for Hong
Kong and Singapore. (see box 3 for a discussion of the Hong Kong
case).
b) Land banking refers to a value capture instrument in
which government acquires land around major cities. It has been used
by countries like Sweden and the Netherlands to capture value and to
direct suburban development.
c) Land Value Increment Taxation is a tax on the increase in
land value brought about by public actions such as the provision of
infrastructure and services to a particular area. This is the purest
form of Henry George's ideas and the best way of value capture. It
has been used in a number of countries around the world with
significant success as a means of capturing unearned land value as
revenue and to limit speculation. In Taiwan the government managed
to raise 20% of total tax revenue through the land value increment
tax in 1995 although this decreased to 13.5% in 1998 as a result of
a slow-down in the market. In Singapore the government introduced a
"development charge" which is akin to a land value
increment tax, because it taxes land owners at a rate of 50% when
changes in zoning rights result in an increase in land value (Bahl,
2001).
In South Korea the land value increment tax was introduced as a
tool to deter speculation. A tax of 50% was levied at landowners for
the sale of land if the sale occurred within two years after it was
purchased. This followed a parliamentary inquiry which revealed that
total increases in unearned urban land values was roughly equal to
the total of earned wages in the same year (Bahl, 2001). Colombia
has also introduced a land value increment tax called the "Participacion
en Plusvalias (PP)". The PP was enacted in 1997 through Law
388 which was aimed at recovering part of the increased land values
resulting from the use of land use regulations in the following
instances:
- Changing the designation of rural land into land for urban or
suburban development
- Modification of zoning or other land use regulations
- Modification of regulations that permit greater building
density" (Doebele, 1998: pg1).
The law allows municipalities to capture between 30 and 50% of land
value increments, with the maximum set at 50% in order not to
discourage developers from participating. The introduction of a land
value increment tax is also currently under consideration in
Australia (NSW) in light of the recent property boom in that country
(Department of Land Affairs and World Bank, 2006).
d) Right of pre-emption is a strategy in which government
pre-empt land transactions by buying the land. Although not very
successful in terms of capturing value, it did decrease levels of
speculation in Japan, Thailand and Indonesia (Doebele, 2001).
e) Land price freezing is a value capture mechanism whereby
government freezes the price of land in certain "overheated"
areas, particularly those close to major public investments in order
to control land price increases. In Korea, although not successful
in capturing value, it did make land speculation less profitable.
Land price freezing was introduced with more success in France where
land price freezes in "deferred development zones," made
possible the construction of major new towns around Paris in the
1970s (Doebele, 2001).
f) General Property Taxation as discussed before usually
comes in the form of a tax on the value of both the land and the
improvement on it. It was used with limited success in Porto
Allegre, (Brazil) as a means of financing infrastructure and housing
for the poor (see Box 1).
Box 3: Land Leasing
Land leasing refers to a process through
which "the state retains the right to own land and lease
only the right to use, develop and transfer land to private
individuals" (Hong; 1996). The advantage of land leasing is
that it provides the government with an opportunity to capture
the future increased land value as government revenue for public
infrastructure investment. Land leasing also allows governments
to achieve a balance between capturing surplus land value as
revenue to finance public infrastructure and service provision
whilst at the same time facilitating private incentives for
investment in land and real estate development (Hong; 1998:
p1577). Lease revenues, which is the money generated by the
government through land leasing, can be collected at four
points; ;
- ?initial establishment of leases
through public auctions for example;
- " through lease
modifications;
- " renewal of leases, and
- " through the collection of
land rent (Hong; 1998).,/li>
In the case of Hong Kong, it was found that land leasing was an
effective way for government to access revenue to finance the
provision of public infrastructure and services (Hong; 1996).
The efficacy of Hong Kong's land leasing programme was measured
on the basis of two criteria; the percentages of land-value
captured and the percentages of public infrastructure investment
financed by the captured land values (Hong; 1996). Hong's study
of 92 randomly selected land parcels leased by the Hong Kong
government in the 1970's found that between 1970 and 1991, the
Hong Kong government was able to capture 39% of land value
increases.
The study also found that the revenues raised through land
leasing covered an average of 55% of the public works
expenditures in Hong Kong. The combined revenues generated
through the collection of property taxes and those collected
through land leasing, financed 80% of the average annual
infrastructure investment between 1970 and 1991 (Hong;
1996:p13). Land leasing is thus not a substitute for property
taxes, but can act as an effective supplement to assist
governments in capturing surplus land value . An analysis of the
transaction costs attached to each of the four points at which
land lease revenues can be collected shows that it is more
effective for government to raise maximum lease revenues at the
point of auction due to lower transactions costs at this point
(Hong; 1998). Governments can thus lease land rights to the
highest bidders. In the case of Hong Kong, between 1970 and
1995, payments received through auctions accounted for 78% of
total lease revenues (Hong; 1998).
|
As has been argued before, the state's efforts can not only be
directed at collecting more money. In order to re-shape the urban
landscape and make our cities more inclusive and sustainable, planning
and zoning instruments need to be used creatively and strategically to
alter the spatial arrangements of the apartheid city. The rest of the
paper offers some suggestions in this regard.
6. Planning and Development Regulatory Instruments- Towards more
Sustainable and Inclusive Cities
6.1. Development and Zoning Levies
"The telecommunications sector has evolved a model
for charging for the benefit of connection to virtual communication
and informational resources which is useful as a framework for
connecting real natural and common resources" (Siochrú;
2002: .8).
Siochrú (2004) uses the telecommunications industry as an
example to make sense of instruments like a development or a zoning
levy. He argues that in the telecommunications industry, users are
typically required to pay three different charges, a connection
charge, a rental charge and a user charge. A development levy is
similar to a connection charge as it is based on the cost of being
connected to roads, water, drainage waste and other infrastructure and
according to Siochrú, "it is the connectivity to public
services and amenities which comprises most of the value of land"
(2004).
The idea of a development gains levy, a tax on new property
developments, has been raised on more than one occasion by the premier
of the Western Cape, Mr. Ebrahim Rasool . This idea although
criticised by the Democratic Alliance for having the potential of
being "difficult to administer and subject to fraud" is not
an unrealistic one and has been implemented in a number of countries.
The United Kingdom is currently investigating the idea of
implementing a similar development gains levy which it refers to as
the "Planning Gain Supplement" (PGS). Property market data
in the United Kingdom showed that the value of land increases simply
because planning permission has been granted (Cooper; 2006). The PGS
is aimed at financing sustainable community development through
infrastructure and service provision, specifically the provision of
more affordable housing. The PGS is expected to come into effect in
2008. The PGS will be levied on land once a developer has been granted
permission to develop the land. The government is also considering the
idea of allowing developers to claim the PGS as a business expense for
tax purposes. Another proposal is to charge those developers who fail
to comply and pay the PGS interest and penalties (Geoffrey Leaver
Solicitors; 2006). A criticism of PGS however, is that it could
discourage developers from investing in development of land which
could freeze the land market and lead to an increase in land prices
(Wetzel; 2004). This however does not necessarily have to be the case
if development levies are set a rate which realistically reflects the
benefit for the developer of connection to infrastructure and
services.
A zoning levy, according to Siochrú's analogy, would be
similar to a rental charge and is levied as a payment for the specific
use of a parcel of land. Development and zoning levies should be
charged at a progressive rate; areas such as rural areas for example
which are poorly serviced should have lower levies than areas in towns
and cities which are well-serviced. Income from development and zoning
levies according to Siochrú, could be pooled in a central
government fund and be redistributed by central government to "redress
imbalances in revenue between wealthy and poorer authorities"
(2004: p9). A downside to this however, could be that the control of
the local authority may be diminished. Another example of using zoning
for developmental purposes is through incentive zoning.
6.2 Incentive zoning:
Traditionally zoning provisions stipulate the property owner's rights
in terms of the use and development of a particular parcel of land.
Zoning has the potential to create value for a particular owner,
depending on the specific usage of the land allowed. Although zoning
in the colonial and apartheid periods has been used as vehicle for
reproducing exclusion in space under the guise of protecting property
rights and a rallying point for articulating NIMBY[20] issues, more
flexible of zoning can be applied by the state to direct and influence
the development of land in a specific way. It can for example be used
by government as a means of producing higher densities and
discouraging wasteful layouts thereby creating more compact
settlements (Siochrú; 2004).
Incentive zoning is defined as "a development in land use
regulation that encourages the creation of certain amenities and land
use designs that a community wishes to promote" (Murphy and
Stinson; 1996). Incentive zoning is a tool used in many US cities to
obtain certain benefits for the community, e.g. affordable housing,
open spaces/parks or day care facilities, from a specific development.
Developers are offered zoning incentives such as a density bonus for
example which would allow more residential units "or a greater
building floor area than is otherwise permitted under the zoning
ordinance"[21] . The density bonus creates a win-win situation
for both the developer and the local authority. On the one hand the
developer can realise greater profits due to more intensive use of the
property and on the other hand it encourages density and more
effective use of space in addition to the amenities the community
receives as part of the deal. In the US, incentive zoning has been
legislated in a number of cities and has received very little
opposition in terms of the legitimacy of the regulatory tool being
challenged in a court of law. Incentive zoning can be very effective
in the South African context, especially considering the exceptionally
high rate of property development which major South African cities
like Cape Town and Johannesburg have experienced over the last few
years.
The current context requires that zoning be used as a regulatory tool
which can be applied in creative ways in the South African context.
Specific areas around viable transport routes for example could be
zoned for affordable, medium-density housing developments. Developers
wishing to obtain zoning rights for construction of a shopping mall or
some other commercial property in the area could then get a rebate on
a zoning levy in exchange for building a certain quota of affordable,
medium density housing. Government is constantly spending money on
infrastructure provision such as roads and railways. According to the
South African Railways Planning report, construction of a railway line
now costs the government up to R30 million per km and takes up to four
years to plan . Government should use the planning and regulatory
tools at its disposal to plan very carefully for the use of land
around the construction of such infrastructure in order to make it
more equitable and allow the poor greater access to the city.
Another planning and regulatory tool, similar in some ways to a
development levy, is exactions. The difference between the two though
is that an exaction can take the form of a levy or "payments in
kind".
6.3 Exactions
Exactions are tools used in the United States in particular to
encourage developers to contribute towards the social costs of
development. Exactions are defined as "conditions or financial
obligations imposed on developers to aid the local government in
providing public services" and can take several forms e.g. impact
fees levied on developers, financing of infrastructure improvements
and land donations (Freeman et al; ). Exactions are contributions or a
payment which a developer must make to the local authority in exchange
for obtaining a development permit. In the city of Francisco for
example impact fees from downtown commercial development are used for
public transit improvements, low and moderate-income housing and child
care. The City of Irvine uses impact fees for traffic improvements
while the City of Fresno uses impact fees to pay for fire stations,
overpasses, railroad crossings and traffic signals required by new
growth[23] . Exactions have grown in popularity as a mechanism used by
local authorities to force developers to consider the impact that
their developments have on the community and to compensate the
community. By the mid-80's approximately 90% of localities in the
United States imposed exactions compared to only ten percent prior to
1960. Exactions can be used in the following way for the benefit of
the poor:
Infrastructure costs - a local authority can
enact specific legislation which makes the provision of certain
infrastructure, e.g. roads, parks, school or other services,
mandatory before a new development is approved (Freeman et al; )
Affordable Housing - local authorities can require that the
developer constructs a certain percentage of affordable housing
units as part of a new development (also referred to as inclusionary
housing or inclusionary zoning) or that developers pay money into a
housing fund (Freeman et al,). South Africa has already seen one or
two such initiatives springing up, although they are few and far
between. One such initiative is the Blythedale Coastal resort on the
KwaZulu Natal north coast which is a 1000 ha luxury development. The
development will include 1 200 housing units. The developer, the éLan
Group, has agreed that 20% of the units would be reserved for
affordable, subsidized housing. These units will be between 30m2 and
80m2 big and will cost between R30 000 and R250 000 (Bhengu; 2006).
Owners of these housing units will have access to the same level of
amenities and services that their "richer" neighbors will
have access to. This kind of development should be encouraged and
should be made mandatory through legislation where necessary, rather
than just depend on the goodwill of individual developers.
Community Benefits - local authorities could also negotiate
with developers to only source local labour from the community and
pay a living wage thereby ensuring that some of the benefits of
development get redistributed to the broader community (Freeman et
al;).
7. Implications for the South African Context
The implications of the proposed value capture mechanisms have to be
carefully considered as they might have unintended consequences. The
introduction of a land value tax could for example put an unnecessary
burden on small-scale, subsistence farmers or emerging black farmers.
Clear protective measures such as progressive rates, tax rebates and
tax exemptions need to be considered for vulnerable groups. In the
case of farmers, the annual farm income could for example be used as a
basis to determine the tax rate. This will ensure a fairer and more
equitable assessment of tax liability.
Government will also need to make provision for possible negative
reactions from other stakeholders such as private residents and
private developers. Public participation in the planning and
decision-making around value capture mechanisms should be encouraged
and should form a critical element of any initiative to capture value.
Case studies of property tax reforms in Tanzania, Kenya and Uganda for
example demonstrate the importance of taxpayer education programmes to
ensure that taxpayers have a good understanding of the rationale and
procedures for the property tax. This should be accompanied by an
improvement in the quality of infrastructure and services provided to
the community in order to manage possible resistance from taxpayers
(Kelly; 2000: p.12).
Buy-in from private developers could be secured through the provision
of specific incentives to developers for example rebates on
development levies, density bonuses, flexible zoning standards,
speedier approval of development plans, etc. Research conducted of
twenty-eight cities in California over a twenty year period found that
the introduction of mandatory inclusionary housing programmes, which
make allowance for the provision of certain incentives to developers,
did not negatively affect the overall level of housing production in
these cities and in a number of jurisdictions, housing production
actually increased (Brunick; 2004: p.5). Evidence from different
states and cities in the USA show that mandatory inclusionary housing
programmes, coupled with "cost offsets" granted to private
developers provide more predictability to developers, produce more
housing for lower-income households and do not "stifle
development activity" (Brunick; 2004: p.2).
Future research efforts should be aimed at identifying additional
value capture mechanisms and their history of implementation in other
countries. More research is needed to study the applicability of the
value capture and regulatory tools discussed to the South African
context. This will include an examination of the legislative framework
for the implementation of these mechanisms. Research should be
conducted to test the political climate through for example interviews
with government officials in order to assess their response to the
proposed mechanisms. A very important element of future research will
be a careful analysis of the origin and destination of the value
captured. Questions which need close scrutiny in this regard are:
- Is a centralized or a more decentralized approach desirable?
- Should each municipality be responsible for devising its own
mechanisms of capturing value and administering those resources in
a way which would be most appropriate for the conditions and
development challenges which exist within that particular
municipal area?
- Should money be pooled in a central fund and dispersed on a
needs basis? Or " Should a certain percentage of value
captured go to national government for redistribution and the rest
be retained by local government?
A lot of education and capacity building of municipal officials will
be an essential component of any attempt to introduce value capture
mechanisms. Municipalities are not homogenous, some are "weaker"
than others in terms of administrative capacity, competency of
municipal officials and the potential to capture value in that
specific locality. These are critical issues which need to be
considered. However, they do not detract from the central argument
that the magnitude of the development challenge which the country
faces necessitates bold, urgent, decisive and strategic interventions
in the market to make it work for the poor.
Conclusion
While South Africa has a broad urban development policy agenda in
place for promoting spatial restructuring and inclusive cities, it is
insufficient to influence the behavior of land and property markets to
work for the poor and to change the current form of urban development
practice which is structured around the spatial imperfections of these
markets. This paper argues that in the same way as a strong state was
needed to create the apartheid city over a protracted period, for
restructuring and transformation to take place an equally strong and
'developmental' state is needed. The state will require the political
will to pursue such transformation and to generate buy-in, leverage
resources, institute the necessary planning and development regulatory
frameworks and develop the instruments needed to change current
development practice in order to transform the urban context and
ensure that markets include the poor. It can not be left up to the
market to address the current development and spatial challenges as
the current operation of the market reproduces and reinforces
marginality, exclusion and poverty.
Secondly, it will be important to ensure that planning processes,
housing instruments, infrastructure budgets and investment
interventions are synchronized and targeted to begin to shift spatial
configuration of the city to engender a more participatory and
inclusive practice. The state must develop the ability to effectively
use existing and devise new innovative instruments for effective
spatial restructuring, social equity and better functioning of land
and property markets through the various means at their disposal
including the strategic alignment of spatial development frameworks,
design and location of restructuring zones, zoning and urban edge
instruments as informed by Integrated Development Plans (IDPs). This
will also include the strategic and incremental targeting of
infrastructure investment and upgrading to trigger the crowding-in of
public property development in specific nodes, zones and corridors
identified in strategic spatial planning and development frameworks to
promote densification along public transport spines.
A third element for spatial restructuring is for the state (all tiers
of government, and parastatals to co-operate) to strategically use
public land and other state resources (especially land located
adjacent to public transport routes and public infrastructure
investments) as strategic levers for spatial and social restructuring
and particularly targeting development zones. Additionally, the state
should lead, by invoking the inter-governmental relations framework,
in transferring suitable and well-located public land targeted and
prioritized for integrated low-income housing development.
The development of mechanisms for value capture and shared growth
from benefits of surplus values accruing from the 'boom conditions' in
the upper end of the land and property market can generate the
necessary additional resources for infrastructure investment that
promotes densification, integration and the generation of resources
for low income residential development on well-located land. In this
regard, it is critical to explore the use of both the 'carrot' of
incentives and the 'stick' in the legislative approaches adopted for
implementing inclusionary development programmes. An innovative
cocktail of interventions should be used, in concert, to address
spatial, social and economic imbalances.
Endnotees
- Millennium Development
Indicators for South Africa, December 2003
- This is the international
poverty line
- "Making Urban Landmarks
Work for the Poor - Excerpts from the Programme Proposal to DFID
- Land Agrarian Reform in South
Africa: An Overview in Preparation for the Land Summit, 27-31 July
2005. Paper prepared by the Department of Land Affairs and
Department of Agriculture, Version 5, 20 July 2005
-
www.sahistory.org.za/pages/specialprojects/land/06_liberation.htm
- State of the Cities Report,
2004
- ibid
- ibid
- Western Cape Strategy for the
Development of Sustainable Human Settlements, June 2006
- Western Cape Strategy for the
Development of Sustainable Human Settlements, June 2006
- ibid
- Henry George quoted in Siochrú,
E (2004)
- Land value taxation could
include site value rating, which is a tax on the value of the land
only or a form of composite rating, which means that the value of
the land is taxed at a higher rate than the value of the buildings
or improvements.
- The site value refers to the
value of the land, excluding any buildings or improvements; the
flat rate refers to the total value including land and buildings
while the composite value refers to a higher rate being charged on
the land than on the value of the buildings or improvements.
- Local Government: Municipal
Property Rates Act, 2004
- Report of the National Land
Summit 27-30 July 2005, Nasrec, Johannesburg, Gauteng, South
Africa. "A partnership to fast track land reform: A new
trajectory towards 2014".
- See for example Aller, P
(2000) "Land Value Tax: Cure for Poverty and Unemployment",
Siochrú, E (2004) "Land Value Tax: Unfinished Business",
De Cesare, CM (1998) "Using the Property Tax for Value
Capture: A Case Study from Brazil".
- Surplus land value refers to
the portion of the increased land value that is generated by
changes in government land-value regulations, public investments
in infrastructure, urbanization, location advantages and/or
population growth (Hong; 1996: 18).
- Mail and Guardian of 10
February 2006
- Not in my backyard
-
www.law.pace.edu/landuse/bincent.html
- Personal communication with
the Head of Planning at the South African Commuter Railway
Corporation "
- A Planner's Guide to Financing
Public Improvements: Chapter 4 - Fees and Exactions".
- Inclusionary housing, also
referred to as inclusionary zoning, refers to the passing of
certain city planning ordinances which require that developers
construct a certain percentage of affordable (for households with
low to moderate incomes) housing units as part of a new housing
development. - www.transcoalition.org/ia/hsincent/01html
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